Since the onset of the COVID-19 health global public crisis last year, the remote working culture that was instantly created has amplified individuals and businesses' dependence on edge computing and cloud infrastructure. Shelter-in-place mandates fueled the demand for remote project collaborations, video conferencing, online classes, gaming, and e-commerce shopping — all powered by the cloud computing technology.
Consequently, Salesforce.com Inc (CRM) and HubSpot, Inc. (HUBS), two prominent and successful players in the software industry, have been thriving. They are shaping the future of enterprise software solutions with their cloud-based offerings. While many expect a retreat to the ‘old normal’ once the coronavirus is contained, experts believe that employees’ increased productivity and lower overhead costs for businesses should keep the remote-working lifestyle going even in the post-pandemic world.
Both stocks generated healthy returns over the past three years. While CRM returned 69.5% over this period, HUBS surged 296.7%. In terms of year-to-date performance, HUBS is a clear winner with 20.6% returns versus CRM’s 3% loss. But which of these stocks is a better pick now? Let's find out.
Click here to check out our Software Industry Report for 2021
Business Structure and Latest Movements
CRM is the global leader in Customer Relationship Management (CRM), bringing companies closer to their customers in the digital age. CRM enables companies of every size and in every industry to take advantage of powerful technologies, namely cloud, mobile, social, internet of things, AI, voice and blockchain to create a 360-degree view of their customers. It operates through two segments–Subscription & Support and Professional services & Other.
In February, CRM closed the acquisition of Acumen Solutions, a leading professional services firm with deep Salesforce knowledge and extensive industry expertise across the public sector, manufacturing, financial services and more. In addition to its Government Cloud Plus infrastructure, which is dedicated to the government to receive, process, store and transmit Federal Taxpayer Information (FTI), CRM recently introduced Vaccine Cloud, to help government agencies and healthcare organizations efficiently deploy and manage the COVID-19 vaccine program.
HUBS is also a leading cloud-based CRM platform provider for businesses in the Americas, Europe, and the Asia Pacific. The company serves mid-market business-to-business companies and provides marketing, sales, service, and content management systems, as well as integrated applications through its platform. HUBS recently surpassed 100,000 paying customers and has hit $1 billion in annual recurring revenue, marking two important milestones in the company’s nearly 15-year history.
In February , HUBS signed an agreement to acquire The Hustle, a media company that produces a newsletter, podcast, and premium research content. The deal will provide HUBS with more ways to offer its community of companies valuable content across a broader range of topics and a more diverse set of media. In fact, HUBS has a large community around its educational content, with seven million people reading the company’s blogs and thousands viewing its videos on YouTube each month.
Recent Financial Results
CRM’s revenue for its fiscal fourth quarter (ended January 31, 2021) grew 19% year-over-year to a record $5.82 billion. Its subscription and support segment generated $5.48 billion in revenue, rising 20% versus the prior year. Its remaining performance obligation ended the fourth quarter at approximately $36.1 billion, an increase of 17% year-over-year, and its non-GAAP EPS came in at $1.04.
In the fourth quarter that ended December 31, 2020, HUBS’s total revenue surged 35% year-over-year to $252.1 million. Its subscription revenue contributed $244.3 million to its overall top-line, improving 36% compared to the year-ago quarter. However, its total average subscription revenue per customer for the quarter was $9,758, falling 3% versus the comparable period last year. HUBS reported an adjusted EPS of $0.40, rising 4.8% year-over-year.
Past and Expected Financial Performance
CRM’s revenue and EPS grew at CAGRs of 26.3% and 107.5%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 35.3%.
Analysts expect CRM’s revenue to increase 21.5% in the current quarter (ending April 30, 2021), 21.1% in the current year and 18.9% next year. Its EPS is expected to grow 27.1% in the current quarter, but decline 30.3% in the current year, and then rise 20.7% next year. CRM’s EPS is expected to grow at an average rate of 12.9% per annum over the next five years.
In comparison, HUBS’s revenue and free cash flow grew at CAGRs of 33% and 60.1%, respectively, over the past three years.
Analysts expect HUBS’s revenue to increase 32.7% in the current quarter (ending March 31, 2021), 32.3% in the current year and 26.2% next year. However, its EPS is expected to decline 3.3% in the current quarter but improve 19.7% in the current year and 43.7% next year. Moreover, its EPS is expected to grow at a rate of 20% per annum over the next five years.
Profitability
CRM’s trailing-12-month revenue is more than 24 times HUBS’. In addition, , CRM is more profitable with a net profit margin of 19.2% versus HUBS’s negative value.
CRM’s ROE and ROA of 10.8% and 0.5%, respectively, compare favorably with HUBS’s negative value.
Valuation
In terms of trailing-12-month non-GAAP p/e, HUBS is currently trading at 348.93x, 695% more expensive than CRM, which is currently trading at 43.89x. CRM is less expensive than HUBS in terms of trailing-12-month p/s (9.23x versus 24.23x).
In terms of trailing-12-month price/cash flow also, HUBS’ 249.12x is 505% higher than CRM’s 41.18x.
CRM looks much more affordable here.
POWR Ratings
While HUBS has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system, CRM has an overall B rating, which equates to a Buy.
Both CRM and HUBS have a Growth Grade of B, consistent with expected growth in their financials. In addition, both the stocks have a Stability Grade of C, reflecting that they are slightly more volatile versus their peers.
However, in terms of Value Grade, CRM has been graded a C, given its moderately lower-than-industry valuation ratios. In comparison, HUBS’ Value Grade of D is in line with its stretched valuation.
Of 61 stocks in the C-rated Software - Business industry, CRM is ranked #9 while HUBS is ranked #26
Beyond what I’ve stated above, our POWR Ratings system has also rated both CRM and HUBS for Momentum, Sentiment and Quality. Get all the CRM ratings here. Also, Click here to see the additional POWR Ratings for HUBS.
The Winner
Companies operating with software-as-a-service (SaaS) business models have thrived during the economic downturn. A SaaS business model converts traditional software licensing to subscription-based services that give flexibility to customers. The idea behind SaaS is to put software on the cloud and then enjoy recurring and predictable revenues.
We believe that both CRM and HUBS are good long-term investments considering the increasing reliance on cloud technology, their market dominance and superior pace of expansion. However, CRM appears to be a better buy based on the factors discussed here.
CRM is a relatively cheaper option to bet on the immense growth potential of the cloud markets and the speed of the global digital transformation. In line with the improving market prospects, CRM is expected to keep strengthening its market position in coming quarters and the stock should witness further upside.
Click here to learn about other top-rated players in the Software - Business industry.
Click here to check out our Software Industry Report for 2021
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CRM shares were trading at $212.58 per share on Friday afternoon, down $3.37 (-1.56%). Year-to-date, CRM has declined -4.47%, versus a 5.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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